Tag Archives: Private Equity

Private equity firms

What private equity firms look for

Private equity isn’t for all types of companies. Their mission is to invest in companies (with a majority or minority stake), create value during a period of approximately four or five years and then sell their share with the greatest capital gain possible. Therefore, they look for businesses that show clear growth potential in sales and profits over the next years. If your company can’t offer this then they won’t be interested in investing in it. Once invested, private equity’s profits will depend on the growth and profitability of your company. If you win, they win. If you fail, they fail.

When your company or the market you work in are growing, a private equity firm might be able to help you. It might also be able to recapitalize your company, exit it or make a transition so that the management team buys it.

Companies that don’t need capital that has stable cash flows and a lot of fixed assets might be better off asking for a bank loan. The same goes for family companies who only want to maintain a good standard of living; they can’t offer a private equity firm the returns they’re looking for. However, companies that are growing a lot and don’t have fixed assets to provide guarantees to banks will need investors to finance this growth. Private equity is an excellent option or one of the few options that exist as banks won’t be willing to loan credit without guarantees.

What private equity firms look for in companies

1- A good management team: except when the plan is to change managers, the quality of a manager is a decisive factor for private equity firms, as they won’t be involved in the day to day running of the company, but the managers will.

2- A market segment that has growth potential: this is also an important aspect because private equity firms need high rates of growth. Another objective of private equity is to get a bigger market share, which makes it important that the company is well positioned to grow within its sector.

3- An ambitious but realistic business plan: a poor business plan with meager growth is of no interest to them. If the plan predicts important sales and profit growth, then make sure you can back it up with facts. Everything should be coherent.

You must bear in mind that private equity firms look for an annual profit of between 20% and 25%. They estimate that one in every five will be a failure and so those that make profits should compensate the losses of those that fail.

«To get annual profits between 20-25% the key aspects are: to improve company management (improving the EBITDA), obtain economies of scale for size or synergies, and try to buy cheap and sell expensive. 

4- Clear exit strategy: private equity firms say that when they study a company they dedicate 50% to analyzing the investment and the other 50% to studying how they can divest after a few years. Therefore, when they invest they already know how they plan to exit. For this reason, we advise you to ask them in advance how they intend to do this.

5- Security: unlike banks, private equity firms don’t know what their return on investment will be. In fact, they might lose everything if their growth plan doesn’t work and the company ends up on the brink of bankruptcy. Private equity firms feel more secure if they get seats on the board so that they can influence the management of the company, agreeing or vetoing changes made to the original business plan. It’s very important that you negotiate all these aspects well. This way, the shareholder’s agreement is balanced and that both parties are protected, not just the private equity firm.

«Private Equity Firms Look for the Return on Investment.

6- A contingency plan: in every business, there are ups and downs. Understanding what could go wrong and having a contingency plan ready in case it happens is essential. It will help build trust.

7- Reputation: people are key components in the development of companies. Because of this, the reputation of your managers in the market will be checked out before investing.

8- Return on investment: return is closely linked to entry price. If the company is very attractive and there are competitors trying to invest in it, private equity firms will be more willing to invest greater amounts and receive lower returns.

We don’t recommend negotiating with only one private equity firm as it gives them an advantage in negotiating opportunities. Creating competition usually leads to a higher price and a better agreement. Anyway, you must be able to create it, and that means having a good business plan and well-written documents, as well as searching for the most adequate private equity firms.

When negotiating with private equity, as well as correctly valuing your business, you will also have to go through different stages to help you maximize the final price.

Private equity firms
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Private equity funds: 19 contributions

Generally, we find the articles about private equity funds in which it is discussed what these companies are looking for or what type of company they invest in. In this article we wanted to change the direction and perform the analysis from the entrepreneur’s point of view, as our main goal is to understand how a private equity firm can contribute to your company.

Furthermore, we usually have the perception that private equity funds or their societies only invest in big companies. This is due to the amount of news about it, however, this conception is far from reality, since most venture capital operations are carried out in family businesses. These are operations that go unnoticed in the press, but that play a very important role to boost our business network.

 Table of contents

What is private equity and who forms it

Private equity entities are investment vehicles. Its mission is to invest in companies, create value over a period of approximately four or five years and sell its stake with the greatest possible surplus value. Private equity funds are the type of investment that generally invest in non-listed companies that find themselves consolidated, therefore, they have a history, growth and cash flows. Private equity invests money in companies in the medium term, usually with entry into the capital of private companies to help them grow and succeed. The counterpart for the risk assumed usually occurs, in case of success, in the form of capital gains.

In growing companies, private equity investors specialize in development capital and family offices, which are offices created for the integral management of a family’s assets. When the company enters a stage of maturity in which the growth stops being so accused and the profits become stable, the potential buyers or capital funds that come into play are the so-called buy-outs, which are capital funds, specialized risk in purchase with debt.

The following table reflects the types of investment according to the stage of the company:

“ If your company is growing and looking to expand, if you want to sell it or pass it on to managers, private equity can help you.

If you already know what private equity is, you might be asking who actually forms it. Or even, who invests in private equity? Within the world of investors in private equity we can distinguish different classes, among which we could highlight the following:

  • Individuals: normally wealthy families.
  • Big organisations: in private equity they mostly look for the possibility to have access to new technology to make the product line better or to carry out an adequate diversification policy.
  • Financial institutions: along with the pursuit of profitability, they also seek to have a quarry of companies linked to the bank or cashier, but without facing the risks of a direct and permanent participation.
  • Institutional investments: insurance companies and pension funds, taking advantage of long-term investment horizons.
  • Organizations and institutions of the public sector: The objective is to promote a financial activity with undoubted positive effects on the business fabric of a country, with the consequent impact on employment, investment, exports and collections for various taxes.
  • Foreign investors: some seek to develop an international network of private equity entities by providing their name and experience. Others look for investment opportunities that the country can offer.

In the area of financial investors, there is a lot of public information about private equity entities and their investment preferences. The family offices, however, will find it more difficult to locate and contact.

Private equity contributions

If your company is growing and looking to expand, if you want to sell it or pass it on to managers, private equity can help you. Apart from being a source of additional or alternative financing, private equity offers a series of “collateral” contributions that in many cases become the true elements of value for the entrepreneur. Below, we indicated a series of private equity benefits that can support your compan

  1.  Inject capital into the company to face the future with greater warranties.
  2.  Support the definition of the company’s medium and long-term strategy.
  3.  Advise managers on a wide range of business areas.
  4.  Can introduce you to many contacts from various sectors and businesses.
  5.  Can provide you with cross-business from other investments.
  6.  Optimize your company’s financial structure, as they are able to offer additional support to projects financed by subordinated debt, etc.
  7.  Help your company’s professional image improve in the eyes of other financial investors, suppliers, clients, employees, etc.
  8.  Manage relationships between partners in a professional manner.
  9.  Demand high levels of professionalization in management.
  10.  Require a level of professional and sufficient reporting to adequately monitor the activity.
  11.  Allow professionalizing the dialogue of the Boards of Directors and focus the decisions towards the creation of value for the shareholder.
  12.  Support the selection and hiring processes of the executive managers.
  13.  Bring some experience in business internationalization projects.
  14.  Allow preparing the company for a sale at approximately 4-7 years with greater guarantees for maximizing the sale price at the exit.
  15.  Design attractive compensation packages for managers, motivating and retaining the main managers to remain aligned with the project
  16.  Leave the entrepreneur or the manager autonomy in the daily management of the business.
  17.  They can contribute simultaneously in mixed operations resources for the shareholder (cash out) and resources for the company (cash in).
  18. They can substitute any shareholders who are not aligned with the business project.
  19.  Allow professionalizing the management of the company with an eye on the employer’s retirement when he does not have a clear succession project.

How to get the financing

Obtaining the financing of private equity funds for your company is difficult, but at the same time it can represent a turnaround during the life of your company. Private equity entities receive a large number of projects, but select one in a hundred. Therefore, when considering the search for private equity for your company, to provide resources and with whom you can stay a few years growing your company, it is essential to prepare the proper documentation so that your company exceeds the filters of private equity entities.

“ Private equity funds will be your partners and you should trust them when they entered the company, but until then, they are your adversaries in the negotiation and you must be careful to protect your own interests.

This documentation must demonstrate the following elements:

  • An ambitious business plan. This plan must be realistic as well as ambitious to obtain financing for private equity. It seeks significant returns and therefore must demonstrate that its market has the capacity to grow, especially through acquisitions. In fact, private equity wishes to carry out consolidation processes in the sector and, therefore, growth via acquisitions is a fundamental requirement for them.
  • Design the exit plan. Private equity, before deciding to enter a company, wants to understand and plan how it will leave that company. Entrepreneurs can also stay in another round of financing with a private equity fund of the next level or, alternatively, they can go out with private equity obtaining a much higher price through the sale to a strategic group.

Keys to negotiating with private equity firms

Another crucial aspect to obtain private equity funds is a good negotiation with investors. If you negotiate with private equity, they will take your free cash flow forecasts and apply a 20% or 25% discount rate. The price that comes out (and if they have found reasonable forecasts), is what they will be willing to pay.

Another way they can lower the discount rate with is debt: the less money they can put and the more they lend them the banks, the greater the profitability that will come out for the money they put in and therefore, the more they can pay for the company. That is why, when negotiating with private equity, it is so important to help your indebtedness with banks. If the banks see that the numbers are solid, clear and well explained and documented, they will be more confident in the future flows presented to them and as a result they will lend more money for investment in the company. The more you help in this, the higher the price the company can sell.

Although there is no magic recipe for negotiating with investors, there are a number of factors that certainly contribute to making the negotiation a success. If you are considering entering a private equity firm and wish to prepare a good negotiation plan, the ONEtoONE advisory team is at your disposal.

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Private Equity or Industrial Buyers: Approach

Private equity firms are essentially financial investors. When pursuing a financial investor, you should consider that their investment criteria typically varies from a typical industrial investor.

Regarding investment objectives

A corporate looking to invest often seeks control over a company’s management, and in turn, are inclined to make long term investments. Their rationality behind investing is to strengthen their own company or business group’s strategic abilities. 

Financial investors mostly look to make a profit on the money that they’ve invested, which resultantly leads to more medium term investments that maintain no responsibility or management capacities in the company.

Additionally, private equities look for acquisition opportunities at bargain prices (they know how to negotiate well), which they will ultimately help to create value within by introducing improvements in the target’s management profile or by growing it through further synergetic acquisitions. Before embarking on an operation, they make in depth studies about the probabilities for exit strategies that will offer them sizable returns.

Payment

When structuring payment methods, private equity firms are more creative than a corporate as they have more experience. Resultantly, they can give incentives to the directors, or agree on creative financing methods on the part of the seller according to their objectives (something that corporates cannot do as they buy companies to integrate them into their own, thus it’s very difficult to measure the fulfillment of these objectives).

As for the price variable, if a corporate is really interested, it usually wins the battle; it can pay more because it can generate synergies with the acquired company or the acquisition can improve its competitive position in the long run.

Their way of financially evaluating a company is usually different: while corporates looking to invest focus more on synergies, financial investors focus on a return on investment and, by way of looking for financial profitability, are focussing on debt capacities, which plays a central role in the transaction for them.

Timing

Industrial investors conduct slower studies and don’t pay as much attention to specific opportunities. They are willing to miss out on opportunities because they know the sector well, and that sooner or later, more opportunities will arise. Because of that, an industrial investor will very rarely overpay. Private equity firms feel more pressure on not missing out on opportunities, and in turn, can be more abrupt with their decision-making.

An industrial investor’s due diligence is easier as it has extensive experience within the relevant sectors, and can resultantly observe and understand the valuable variables. It looks at the industrial points and how they can fit into its own project.

Moreover, industrial investors try not to auction. Auctions are set up within restricted time slots and, sometimes, this lack of time doesn’t let them thoroughly analyze or determine strategic fits. Generally speaking, as a business owner you will probably feel more at comfortable speaking to an industrial investor as they will speak your language.

 

The biggest challenge that emerges with these opportunities is knowing how to approach them and to not be deceived. If you are looking for an investor and can’t figure out your best option, do not hesitate to contact us for strategic advisory!

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Six Things to Know When Negotiating with a Private Equity

Private equities have well prepared specialists who know how to satisfy their interests and buy at very attractive prices. They will be your partners and you will have to trust them when they become part of your company, but before this will happen, they are your opponents and you should be careful to protect your interests. In this article you will learn about six methods you can use when negotiating with a private equity firm. Continue reading!

3 recommendations before sitting at the table 

1. Don’t negotiate only with one private equity firm. Prepare alternatives, whether they are private equities or other type of buyers and investors. If you only negotiate with one, you will lose negotiating power.

2. Use a M&A advisor. The sale of a stake to a private equity is usually a more complex process than selling to an industrial investor. Therefore, we strongly recommend that you don’t embark on negotiations alone; hire a professional advisor who is as prepared as your counterparty is.

For every one hundred projects presented to them, private equity firms only invest in one or two. That is why it is very important to prepare good documentation in order to pass the filters of many PEs and create competition.

3. Clean the mess. Business owners sometimes mix family and business properties and they incorrectly charge expenses to the company. This means that profits are officially less and therefore taxes will be less too. Other times, with the same objective, certain incomes are not declared. Both of these techniques will create problems if you’re trying to sell, as the investor will only pay for profits that are official. Other incomes and profits do not exist until they’re official.

When there is a lot of unofficial money, private equity firms prefer not to invest as they believe that too many tax risks exist. Therefore, if you want them to invest in your company, an important step to take is to start making your finances official and cut out all bad tax habits you might have.

When sitting at the table negotiating with a private equity

4. Be realistic with the business plan. Your information memorandum should describe the amount of resources you are hoping to get and what you plan to do with them. The document should also include a sensitivity analysis and the expected return on investment for the private equity firm.

If they see a plan where sales growth is not realistic, expenses are wrong, there is a lack of foresight and so on. This can cause distrust. Make sure your plan is coherent.

5. Prepare for a cut after the due diligence. They will try to make the most of the confusion with all the data taken from the due diligence to negotiate aspects where contingencies haven’t emerged. For that reason you must remember that negotiations continue until the very end.

6. Conduct your own due diligence of the private equity. You also need to analyze the private equity firm you are negotiating with. A good way of doing this is to speak with other owners who have worked with them. Private equity firms usually put the companies they have invested in on their website.

 

You already have a plan for the growth of your business and you know that you a private equity firm to carry out it. But who can take on this role? Where can you find the right partners? And most importantly, will they want to invest in your business? At ONEtoONE we couple our unique research and mapping methodology with our extensive global network, to attract and select the best possible investors for your company. Don’t hesitate to contact us for a strategic advisory!

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Mergers & Acquisitions, Compraventa de empresas

Beware of the shark´s kiss

Private equities have many techniques to get what they want. They are manufacturers: they manufacture money, buying cheap and selling expensive, so beware.

Don’t only negotiate with one private equity firm; prepare alternatives, whether they be private equity or other buyers and investors. If you only negotiate with one, you will lose your negotiating power.

The sale of a stake to private equity is usually a more complex process than selling to an industrial investor. Therefore, I strongly recommend that you don’t embark on negotiations alone; hire a professional advisor who is as prepared as your counterparty is.

Private equity firms will try to get exclusivity during negotiations; don’t grant it to them until you have a good letter of intent. This way you won’t lose negotiating strength while you try to agree on key points.

*1*When negotiating with a private equity firm, I recommend that the letter of intent be as binding and closed as possible.*2*

I try to negotiate all the key areas of the operation in this agreement so that the private equity firm has less room to maneuver after due diligence is finished.

I suggest you to do a due diligence and analyze the private equity firm you are negotiating with. A good way of doing this is to speak with other owners who have worked with the firm. Private equity firms usually put the companies they have invested in on the website.

They will be your partners and you will have to trust them when they become part of your company, but before then they are your opponents and you should be careful to protect your own interests.

 

Written by Enrique Quemada, President of ONEtoONE Corporate Finance.

Enrique_Quemada_President_Global_ONEtoONE

Mergers & Acquisitions, Compraventa de empresas

How a Private Equity Firm can help you?

Private equity firms are investment vehicles. Their mission is to invest in companies (with a majority or minority stake), create value during a period of approximately four or five years and then, sell their share with the greatest capital gain possible.

Private equity makes mid to long term investments of money in companies (a maximum of ten years) usually investing in the capital of private companies to help them grow and be successful. The return for the risk taken is normally in the form of capital.

Unlike banks, which lend money regardless of your company’s financial situation in order for it to be returned with interest on set dates, private equity invests in your company in exchange for owning a piece of it. After a private equity investment, you will have a smaller piece of the cake, but your piece could end up being worth a lot more than what you had before the investment.

Once invested, the private equity’s profits will depend on the growth and profitability of your company. If you win, they win. If you fail, they fail. Private equity firms usually bring added value to your company, providing credibility in the face of third parties and offering you their management experience.

Private equity wants to increase your company’s value without taking control of the day to day running of it. If it has been previously agreed, or if the business plan has not been followed, they sometimes elect a management team.

In summary, the main characteristics of private equity are:

• Risk: the allocation of capital doesn’t have any personal or real guarantee.

• Orientation towards innovative companies: that has the following four characteristics- good management team, high growth potential, a real competitive advantage and real possibilities for divestment.

• Temporary and usually minority share: looks to provide stable financial support in times when it is hard to get. If these initial stages are overcome, the private equity will give way to other investors, recovering their original investment as well as capital gains in return for the risk taken.

• We advisors say that there is no such thing as majority or minority, only good or bad shareholder agreements. Therefore, the agreement is as important as the type of shares.

• Management support and added value: the investor plays a part in board meetings, not only to monitor the investment, but also to provide expertise and ease access to potential partners, clients and suppliers.

• Compensation via capital gain: once past the greatest risk stages, they look to be substituted by other investors, receiving compensation for the risk taken and the help provided.

If your company is growing and has the four characteristics mentioned above, then private equity can help you. It can also help you if you’re looking to sell your company or give it over to management.

Have you found the right private equity firm?